Vocation chief Mark Hutchinson ‘should have been axed earlier’ after a damning audit review into the quality and practices of two of its businesses and the aggressive revenue recognition practices; How hedge funds predicted Vocation’s collapse

http://www.theage.com.au/business/vocation-chief-mark-hutchinson-should-have-been-axed-earlier-20150128-12zssi.html

http://www.afr.com/p/blogs/christopher_joye/how_hedge_funds_predicted_vocation_r6J4KeYJJzzNunta13gz6H

http://www.theaustralian.com.au/business/vocation-shares-dive-again-as-education-investigations-revealed/story-e6frg8zx-1227106479941?nk=511df2786b662fdf04e8914bcd346c7d

http://www.afr.com/p/business/companies/the_rise_and_fall_of_vocation_X4tajs9xj20pZn5aqBekRM

Vocation chief Mark Hutchinson ‘should have been axed earlier’

January 28, 2015 – 5:36PM

Simon Evans

Vocation

Former CEO Mark Hutchinson announced Vocation’s bottom-line loss was expected to be $27 million – almost $60 million worse than a profit forecast made by the company in December. Photo: Nic Walker

The largest shareholder in ailing education firm Vocation is warning against a “fire sale” of assets and says the board squandered an opportunity for a more timely restructuring by not removing chief executive Mark Hutchinson last year.Mr Hutchinson finally resigned on Wednesday as the company warned it would slump to a $27 million bottom line loss for the first half of 2014-15. But 15 per cent shareholder Brett Whitford says the board should have axed Mr Hutchinson last year because his exit was inevitable when the company’s credibility was shredded.

“We lost valuable momentum and time in what was inevitable to everyone,” Mr Whitford said.

“That would have given us time to restructure in a more timely manner.”

Vocation revealed on Wednesday it is now looking closely at a potential merger with another company and has had approaches from a number of outside parties wanting to buy some of the individual education businesses.

New chief financial officer Stewart Cummins said a number of options are being scrutinised as Vocation tries to stabilise.

“Certainly a merger is absolutely a possibility,” Mr Cummins said.

Mr Cummins, who is two months into a six-month stint as interim chief financial officer, declined to specify which businesses were the most sought after by buyers, but said interest had been strong.

Asset sales and a recapitalisation are also being considered.

He and new chairman Doug Halley are working closely with National Australia Bank, Commonwealth Bank and Westpac, which make up the banking syndicate to Vocation. Mr Cummins emphasised that the fundamentals of the individual businesses were solid, but it was in its infancy as a parent company after Vocation was formed through the merger of three businesses, and then acquired more including the $84 million purchase of Endeavour College, which specialises in natural health courses.

“This is a relatively young business and what we need to do is to rebuild,” he said.

The Vocation board has appointed 333 Capital, the corporate advisory arm of insolvency firm KordaMentha, to examine the potential sale of some assets to pay down debt.

But Mr Whitford, a co-founder of Vocation who was ousted as an executive in June, 2014, said opportunistic buyers would pick them up for cheap prices to satisfy the banks.

“I’m concerned that it appears we’re having a hasty fire sale,” Mr Whitford said.

But he conceded that Vocation itself had bought businesses at the top of the price cycle.

Mr Whitford spent $4.5 million lifting his stake in Vocation to 15 per cent in early December. Earlier in his career he built up the Customer Service Institute of Australia, one of the three main training and education businesses that were combined to form Vocation.

Vocation said on Wednesday that a suspension of trading in its shares on the Australian Securities Exchange would continue for at least two weeks while it thrashes out renewed arrangements with its bankers and finalises a strategic review.

Vocation chairman Mr Halley said when one-off costs and discontinued businesses were stripped out, Vocation expected to report an underlying earnings before interest, tax and amortisation of $3 million in the six months ended December 31, 2014. But the bottom-line loss was expected to be $27 million, much worse than originally anticipated. Mr Hutchinson told the board he intends to resign. Vocation directors said he would step down after a replacement has been found, and they are considering both external and internal candidates as part of a strategic review. Vocation shares were trading as high as $3.40 in early September, 2014 but suffered a big slide as investors lost confidence in the board and management. They last traded at 25¢.

The share price plunge was initially triggered after it revealed the Victorian Department of Education had stripped almost $20 million from the company’s funding after a damning audit review into the quality and practices of two of its Victorian businesses, BAWM and Aspin.

Those two businesses have since been disbanded and almost 90 employees made redundant.

The serious damage to Vocation’s reputation in turn resulted in a sharp downturn in student enrolments which prompted the company to announce in early December that it was slashing in half its profit forecast for 2014-15.

The December profit downgrade cut the forecast for earnings before interest, tax, depreciation and amortisation to between $25 million to $30 million, from a previous EBITDA forecast of between $53 million to $57 million which had been provided in October.

The fresh announcement by Vocation on Wednesday said there had been “heavier than anticipated” earnings impact from the audit review and subsequent settlement with authorities. This had a serious knock-on effect to student enrolments.

Former federal treasurer and education minister John Dawkins resigned as chairman of Vocation in late November.

Vocation shares dive again as education investigations revealed

THE AUSTRALIAN

OCTOBER 30, 2014 12:00AM

Ben Butler

Sarah Danckert

Embattled education group Vocation is embroiled in a previously undisclosed investigation by the federal skills regulator, while Victorian authorities have revoked the qualifications of 2400 students in a separate probe.

It can be revealed that the Victorian regulator raised concerns about Vocation’s troubled BAWM subsidiary in August last year, some three months before the company raised $143 million from investors and floated on the ASX. Vocation’s woes continued yesterday as its stock slumped for the second day running amid an exodus from the company by institutional investors.

The private education provider has also clashed with disability charity Yooralla, which wants ­Vocation to stop using its name to re-enrol students.

A spokesman for the Australian Skills Qualification Authority said Vocation subsidiary Aspin was “currently the subject of an ASQA audit”.

“It started a couple of weeks ago,” he said.

“The audit is ongoing.”

A Vocation spokesman said the substantive part of the ASQA probe was finished and the regulator was waiting for a response from the company.

BAWM and Aspin were the subject of a Victorian Department of Education and Early Childhood Development review that Vocation on Monday revealed would result in it losing almost $20m in state government funding under a deed of settlement.

The shock announcement, which followed months of denials that the probe was material, caused Vocation stock to plummet almost 57 per cent on Tuesday.

Vocation did not disclose to the market that it was also under investigation by state training regulator the Victorian Registration & Qualifications Authority, which the company’s spokesman last night said fed into the departmental review.

A VRQA spokesman said the regulator’s investigation, into ­Certificate III qualifications in warehousing operations and competitive systems and prac­tices, started in August and had been completed.

“As a result of this, BAWM will be recalling qualifications from 2409 students,” the spokesman said.

He confirmed that BAWM had also failed to meet all its compliance requirements when it was audited in July last year, but said the problems had been fixed ­before Vocation floated in ­December.

Platypus Asset Management dumped its 5.1 per cent stake in Vocation yesterday in a series of trades when the market opened.

Platypus executive director Donald Williams said he was not sure yet whether he would launch legal action or participate in a class action if one arose.

“It’s very disappointing,” he said, describing the sale of the stake as a “forced sale”.

Platypus first bought into ­Vocation during its float, and participated in the September capital raising.

He also questioned the due diligence of the company ahead of the float and its disclosure practices. “There’s a lot of work to be done about what happened and when,” he added.

Greencape Capital fund manager David Pace confirmed it offloaded its 4.18 per cent stake in Vocation a few weeks ago, saying: “It’s going to get incredibly messy. I can’t believe they raised capital in the interim. There is certainly going to be a class action.”

Vocation shares yesterday closed down 8 per cent at 91.5c.

How hedge funds predicted Vocation’s collapse

PUBLISHED: 07 NOV 2014 14:55:00 | UPDATED: 07 NOV 2014 18:27:41

CHRISTOPHER JOYE

It may be one of the greatest Australian hedge fund trades ever: the “short-sales” that profited from the spectacular 77 per cent decline in the share price of education company Vocation after almost a year of pain.

While shareholders have lost over $590 million since Vocation’s share price peaked in September, one of the hedge funds shorting the stock has banked $20 million in profits.

And while The Australian Financial Review was watching for most of the ride, their story has never been told.

In early November 2013, Vocation’s chiselled 34-year-old chief executive, Mark Hutchinson, was pounding the pavement with his chief financial officer, Manvinder Gréwal, pitching an initial public offering. Two institutional hedge fund investors attended Hutchinson’s presentation at Macquarie Bank’s offices in Martin Place, Sydney, as potential buyers.

While the hedgies warmed to the affable CEO, they were “deterred by three factors”, says one, who first spoke to the Financial Review in December 2013. Working for a household name, the hedgies have refused to be identified, fearing a backlash against short-sellers who hunt for failing businesses. Some call it economic schadenfreude.

“Our first concern was the exponential growth in Vocation’s prior earnings care of Victorian government handouts,” said the portfolio manager, whose previous short scalps included Allco, Babcock & Brown and Aristocrat Leisure.

“Another worry was Vocation’s forecasts for an ambitious tripling of revenue. Our final issue was that four-fifths of its top line came from public subsidies, which could be pared back.”

ECHOES OF MCMILLAN SHAKESPEARE

Vocation was an IPO stitch-up of three businesses that provided “vocational education and training” (VET) courses in competition to taxpayer-owned TAFEs. Victoria was a leader in opening up TAFEs to private competition and doled out subsidies to companies that helped eliminate student fees. The problem was the subsidies were uncapped, which encouraged rorting, like enrolling students in multiple courses they weren’t completing. The result was massive budget blowouts: in 2011-12, Victoria spent more than $1.3 billion on subsidies – well beyond its $900 million budget. South Australia had similar troubles with its VET handouts.

Vocation reminded the hedgies of the risks that haunted McMillan Shakespeare, a salary-packaging company that suffered a savage 50 per cent share price fall when the Rudd government announced changes to tax concessions that powered its revenues.

While the hedgies were not buyers, there was, equally, no catalyst for shorting Vocation. Although short-sellers are frequently demonised, they can play a vital role in identifying mispriced stocks with inherent flaws that are being pumped by spruikers. Vocation is arguably an example.

Short-sellers profit from a declining share price by opening the position through “borrowing” the company’s stock from an existing shareholder (via a “prime broker”). They then sell the shares at today’s price and must pay the lender any ensuing dividends. To close-out (or “cover”) the short, they can buy the shares back and return them to the shareholder.

If the share price falls (rises) in the intervening period, they will make a gain (loss). Risks are, however, asymmetric. A short-seller’s returns are capped because the share price can only fall to zero. In contrast, potential losses are unlimited because there is no ceiling on how far the price can climb.

TIMING RAISES RED FLAG

There were at least two short-sellers betting on Vocation’s demise: Perpetual and Justin Braitling’s Watermark, which runs about $500 million. Perpetual accounted for roughly half the short-selling interest.

In October, a Perpetual performance report unwittingly revealed its $255 million Pure Equity Alpha Fund – profiled here in June 2013 – had one of its “largest short positions [in] . . . Vocation”. Perpetual also disclosed another fund run by the same team, the $620 million Shares-Plus Long Short product, was short Vocation. These lucrative trades contributed strongly to returns in September and October.

The trigger for the first hedge fund to short Vocation days after its December 9 IPO was an “alarming” inconsistency. The institutional bookbuild – where investors bid for stock – was scheduled for November 14. But the company moved it to November 7.

On November 15, the Victorian government coincidentally announced it was cutting VET subsidies to combat private-sector rorting. Two of Vocation’s top five revenue-generating courses had subsidies slashed by one-third. This was days before Vocation lodged its prospectus on November 18. While the prospectus and a subsequent iteration published on November 27 cited regulatory risks, neither referenced the government’s decision.

One analyst, Paul Graham from broker CLSA, wrote that the changes were a “material reduction” that would be a “headwind in Vocation’s biggest market”. Yet Hutchinson denies the company underplayed the cuts. “These cuts had been budgeted by us from mid-2013,” he says. “They had been forecast and were a known quantum reflected in the prospectus.”

In March, Vocation told me the net impact of the cuts was a 12 per cent drop in its Victorian subsidies. But it countered that future enrolment growth would “far outweigh” this. The 2014 financial year results published in August would vindicate this view, although the government’s devastating out-of-cycle audit of three Vocation courses – afoot in August – would find it had been pushing students into inappropriate courses.

When, on October 23, Vocation announced the audit results, which it had consistently claimed would be immaterial, its share price plunged from $2.29 to 99.5¢. The market was shocked to learn Vocation had surrendered an unprecedented $19.6 million of funding and was shutting down its biggest earner, BAWM. Today, the stock is trading at 78.5¢ – a staggering 77 per cent below its all-time high. Investors in the IPO have dusted more than half their dough.

PATIENT FUND POCKETS $20M

Watermark started short-selling Vocation in March and closed out the position over late September and early October. While it made solid profits on the trade, which was predicated on regulatory risks, it did not benefit from the post-audit price dive.

The more patient hedge fund that began shorting Vocation in December 2013 crystallised cumulative profits of $20 million-plus. Although the stock sank 35 per cent to $2.17 before the audit was published, the brass-balled traders did not start covering until it hit $1 days later. This short was the most painful they had endured in their careers as the price jumped from their entry level of about $2 to over $3.30 in September.

The Financial Review has sighted the hedgies’ internal case for their strategy. The thesis was “Vocation’s business model is completely at odds with the Victorian government’s goal” of minimising subsidies.

“Vocation is trading on a forward price-earnings multiple of 19 times compared to McMillan Shakespeare’s multiple of 10 to 11 times,” the hedgies said. “Forecast earnings have increased 70-fold in three years thanks to subsidies. We believe the [November 2013] funding cuts are not the last and, with 80 per cent of revenue from Victorian subsidies, future earnings are at risk. The market is extremely complacent about these risks.”

In March, the hedgies told the Financial Reviewan 11 times multiple was more justifiable, “implying a $1.25 price, which is where we see fair value”.

Their due diligence discovered that a 2013 audit of Vocation’s largest subsidiary, BAWM, which was also targeted by the 2014 probe, had unearthed “inconsistencies”. This included churning students through courses at improbable speeds. Students were allegedly being “channelled” into high subsidy-paying programs that many would not complete. (A separate 2012 study of BAWM concluded it had 48 per cent dropout rates.) One of the worst offenders was the “Certificate III in Warehousing Operations” course, which accounted for 34 per cent of Vocation’s 2013 subsidies. This would be fingered again by the 2014 audit.

The hedgies noted that the Victorian government’s November decision would cut this course’s subsidies by one-third, increasing pressure on BAWM to somehow recoup losses.The hedgies were also critical of the founders, “who pulled $225 million out of the IPO”. “This came from virtually no value two years ago – they made $225 million courtesy of the Victorian taxpayer.” In his defence, Hutchison took substantially less money off the table than his co-founders, retaining half of all his equity, and his business, AVANA, had negligible exposure to the Victorian market.

HUTCHINSON DIGGING IN

One of the risks to the strategy was Vocation buying other businesses across Australia and mitigating its dependency on Victoria. In late May and early June, the company obliged, spending $131 million on two credible acquisitions. Weeks later, the share price leapt to $3.20. The mark-to-market losses this imposed on the shorts forced at least one hedge fund to reconsider its logic. But they stubbornly stuck to their guns.

Then, on September 10, Vocation revealed it was raising $74 million of new equity underwritten by UBS. One of the hedgies thought this was a “peculiar move”. “After telling the market post-results that acquisitions were on the backburner for the rest of the calendar year, out of the blue Vocation announces an equity raising,” he wrote to his partner.

“Why not wait until after the audit is finalised, the suspended funding contracts are reinstated, and when they know what they are buying?”

Capital raisings without acquisitions are a classic short signal and the hedgies were emboldened. The rest is history.

Long-only investors Tyndall, Platypus and Paradice have all lightened their once big shareholdings, exacerbating the down-draft. The most profitable short-seller says Vocation is worth 85¢ today and he would consider buying back in at 50¢. But the hedgies worry that, with the Victorian elections in November and opposition parties unconvinced about privatising TAFE services, political risks remain. This is also true in other states looking to avoid Victoria’s mistakes.

Vocation faces the spectre of litigation from disgruntled shareholders who think it failed to satisfy its disclosure obligations in the capital raising. Yet management has some surprising support. The biggest hedge fund says no one could have forecast the size of the funding lost after the audit, or that Vocation would shut its most valuable subsidiary.

Hutchinson, who battled African poachers in his 20s, is digging in: “I am absolutely committed to seeing the company through its difficulties.”

The author is a director of Smarter Money Investments.

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The Australian Financial Review

The rise and fall of Vocation

PUBLISHED: 01 NOV 2014 05:03:48 | UPDATED: 03 NOV 2014 00:13:53

Mark Huthcinson in February, when life was very different for the chief executive nicknamed ‘Thor’. Photo: Nic Walker

JOE ASTON AND SIMON EVANS

It’s the afternoon of Thursday, August 21, and Mark Hutchinson, chief executive of ASX-listed education and training services company Vocation, is preparing for what will be the most fateful phone call of his career.

Hours earlier, Vocation delivered its maiden profit result as a listed ­company and on the surface things looked good. Profit and revenue were ahead of prospectus forecasts and the company’s stock, issued at $1.89 in December 2013, would close that day at $3.05.

Hutchinson should have had an easy time of it on the conference call to discuss the results, but rumours were building that there were big problems with the Victorian government funding that Vocation received via its key subsidiaries. The inevitable question eventually came:

Broker: Has there have been any changes to the status of your funding contracts in Victoria since July 1?

Hutchinson: No.

Broker: Is that correct? Let me be very clear here. I just want to reaffirm that there has been no changes to funding relating to your Victorian contracts, correct?

Hutchinson: (slight pause) . . . No.

Little more than two months on, that exchange has come back to haunt ­Hutchinson and the board of Vocation, led its chairman, the former federal treasurer John Dawkins.

After the close of the market on Monday, Vocation finally confessed to what many, including The Australian Financial Review’s Rear Window column, had been saying for weeks – one of its key subsidiaries had been stripped of $20 million in government funding, and the company’s earnings would take a $5 million hit.

The fallout has been spectacular. More than $350 million has been wiped off the value of Vocation in the space of a few days, as its shares plunged by more than 60 per cent. Victoria’s vocational education sector is in turmoil and the credibility of ­Hutchinson and Dawkins has been called into question.

Dawkins, who was federal minister for education and training in the Hawke and Keating governments and the father of the HECS university funding model, had already weathered some minor controversy even before Vocation joined the ASX – he was chairman of two high-level councils providing advice to government ministers on regulatory standards and then popped up as the chairman of Vocation.

But that pales into insignificance to the Vocation mess.

Dawkins’ assurances won’t stop the questions over Vocation’s disclosure and governance practices, the effectiveness of regulation in the vocational education sector, and the cracks in business models built on grabbing as much taxpayer money as quickly as possible.

There are worries that some operators are indulging in a profit-driven churn through, trying to maximise student numbers and clip the ticket as they channel students through the system, against a backdrop of jobseekers’ fears of unemployment in a skittish economy.

Senior Victorian MPs, including shadow higher education minister Steve Herbert, have lashed a “tick and flick’’ approach being rampant in the industry without regard for the quality of the education of course participants.

A $9B-PLUS PIE

Vocation is only one of the flood of companies that have sought to snare a bigger slice of a $9 billion-plus pie as governments shift away from providing ­vocational-based training traditionally shouldered by the TAFE system, and leave it to private operators. But its rise and fall goes to the heart of the problems in the sector.

Vocation was formed through the merger of three sizeable Registered Training Organisations (RTOs): Hutchinson’s Avana; Brett Whitford’s Customer Service Institute of Australia (or CSIA); and BAWM, founded by five partners including Wendy Bonnici and Michael Langtree. Vocation had a total of 40,000 students going through its courses. It was a new and exciting enterprise as charming as Hutchinson himself, the handsome surfer and family man who has the nickname “Thor”.

Vocation promised to surf the wave of private, demand-driven higher education delivery sweeping the country. BAWM in particular was a shining light in its home state of Victoria, where students contribute almost nothing to their course fees and the government pays the private trainers on a pro rata monthly basis.

The company listed on the ASX in late December in a $253 million float. Upon listing, BAWM’s five principals received $102.7 million in cash. Hutchinson and Whitford also received sizeable cash sums for their businesses.

Whitford’s adviser Dawkins became chairman, while Hutchinson became chief executive. Whitford, Bonnici and Langtree sat on the executive committee.

Vocation soon gobbled up more training business – such as the Endeavour College of Private Health for $84 million – in an aggressive strategy to expand further in a highly fragmented industry.

But behind the scenes, all was not well with the group’s earnings engine, BAWM.

Between 2011 and 2013, it had increased its Victorian government funding exponentially from $2.4 million to $110 million, under the watchful eye of senior education bureaucrat Fred Ritman.

In 2013, Ritman quit as Victoria’s director of funding and quality assurance in the Higher Education and Skills Group of the Department of Education and Early Childhood Development and joined a small education IT company called OzSoft. He acquired a 10 per cent stake in OzSoft on July 31, 2013, the same day Bonnici and Langtree also became OzSoft shareholders. Vocation’s November 18 Prospectus revealed that OzSoft had subsequently become majority-owned by BAWM.

Early in 2014, Whitford raised concerns with Dawkins and Hutchinson about the OzSoft transaction. He also raised issues about dodgy practices at some Vocation subsidiaries, including those turned up in a 2013 audit of BAWM by the DEECD. Separately, Whitford was a significant shareholder in listed law firm ILH, chaired by Dawkins too, and it is believed the two men also had disagreements about that company as it teetered on the brink of administration.

Whitford, then and now Vocation’s largest shareholder, was frozen out by the board and then fired in June this year.

FORENSIC AUDIT

Another figure who had by this time raised concerns was Lee Watts, Ritman’s former direct report and DEECD’s executive director of training market operations. On July 3, the DEECD wrote to BAWM advising it was withholding payment of all continuing funding until issues were resolved. Watts’ branch then commenced a forensic audit of BAWM and another Vocation subsidiary, Aspin, and specifically the delivery of three major courses they were claiming government funding for. Watts’ team were poring over documents in BAWM’s Melbourne office throughout July and August. Unsurprisingly, word got around the sector.

On August 21, the day of Vocation’s full-year results announcement, the company released a slide presentation to the market which maintained that its “current government support” in Victoria was a whopping “$1.2 billion of funding over the next three years”, the lion’s share of which was receivable by BAWM.

Also that morning, Fairfax business columnist Michael West wrote that “today, [Vocation] investors would do well to ask how the rule-changes around auspicing [an industry term for when training organisations subcontract course delivery to third parties] are affecting BAWM, and whether BAWM’s auspicing has been compliant”.

It turned out to be a very prescient piece of commentary. Because naturally, that’s exactly what investors asked Hutchinson on the results conference call. Hutchinson denied there were problems.

On Sunday August 24, the Financial Review advised Vocation that it was certain BAWM’s funding had been suspended by the DEECD and asked Hutchinson to explain his denial on Thursday’s conference call. It received this non-answer: “Suffice to say Vocation takes its continuous disclosure obligations extremely seriously and is comfortable that it has at all times fulfilled these obligations.”

But the next day, Vocation responded to an Financial Review article with a statement to the ASX, confirming that indeed the DEECD was “undertaking a review” of its funding for three particular courses and “has withheld recent payments”.

However, they added fatefully that “neither the review nor its anticipated outcomes are material to Vocation” and were “part of Vocation’s normal business activities”.

For the most part, the market believed them. Almost universally, the analysts maintained a “buy”, and lofty price targets on the stock (with the notable exception of Taylor Collison’s Michael Croser, who outlined BAWM’s problems in a lengthy research note on August 22. CLSA had also been bearish since Febuary).

So Vocation shares just kept going up, peaking at $3.31 on September 9, and valuing the company at $650 million, just 10 months after listing at a market capitalisation of $253 million.

Hutchinson had no trouble finding an underwriter (UBS) or subscribers when it undertook a $74 million capital raising on September 11, ostensibly to pay down debt and fund acquisitions.

A week later on September 18, in response to another Rear Window item, Vocation issued another ASX statement reiterating its position that the review was part of normal business activities and its anticipated outcomes were immaterial. But doubt was starting to creep into the minds of investors. The stock plunged 14 per cent that day, ­closing at $2.55.

Hutchinson addressed a conference call hosted by brokers Ord Minnett on September 19 and despite his statement the previous day, finally confirmed to the lucky few listening what he had repeatedly declined to acknowledge to the wider market: that 100 per cent of BAWM’s funding had been suspended, not just the funding for the three specific courses being reviewed. Shares continued to drift, dipping below $2.20 when the company held its AGM on October 16.

On Thursday October 23, the company requested a trading halt while it finalised the outcome of Watts’ audit.

COVER BLOWN

Finally, Hutchinson’s intransigent insistence of immateriality had been blown sky high. After all, if the outcome of the review wasn’t material, then why the halt?

Four days later, Vocation finally announced it had been stripped of $20 million in government funding and was closing BAWM and Aspin down. The board was at pains to point out it had been “consistently advised during the course of the review that the issues raised by the DEECD were able to be resolved without a material effect on Vocation” and that “the amount to be forfeited was substantially greater than the board had been previously advised”.

These lines were clearly designed to ­buttress against the circling plaintiffs now considering a class action on the basis that the capital raising in September was sold on a misleading presentation of ­Vocation’s position.

On October 28, the ASX issued a “please explain” notice to Vocation, asking when the company was first aware that its funding was being withheld by the DEECD (which it only revealed to the market on August 25 in response to a Financial Review article).

Only then, in its October 30 response, did Vocation confirm it had been aware since July 3.

Vocation is restructuring fast to try and win back the trust of the investment community. Bonnici, thanks to investors and Victorian taxpayers now a very rich woman, is leaving the business, and the equally enriched Langtree is likely to follow her out the door shortly.

So too will their fellow co-founder Amanda King, who was BAWM’s compliance chief during the damning period scrutinised by the government audit, is listed as head of education at two other Vocation subsidiaries, Learning Verve and Training & Development Australia. As part of the settlement with the DEECD, both of those subsidiaries have now been approved to deliver the very three courses that BAWM and Aspin were stripped of – a deal that has left other industry players smarting.

It is entirely possible that Whitford, who is still the major shareholder with 8.9 per cent of Vocation, will now lobby shareholders to be returned to the company as its saviour, a move that Dawkins would fight bitterly.

Meanwhile, another Vocation executive, Ross Robinson, has been elevated in the pecking order to oversee the “discontinuation of the use [of] third-party training and assessment providers.”

Others are tending their wounds too. Last week the investment arm of UBS lifted its holding in Vocation as a result of UBS entities such as Warbont Nominees lending out stock to third parties including hedge funds under complicated stock lending arrangements, which enabled those hedge funds to short the stock – which in practical terms means making a bet that its price was about to fall.

NO PANACEA

Of course, restructuring on its own is no panacea for Vocation – far from it.

BAWM was the post-float group’s organic profit driver precisely because of its auspicing model. Auspicing generated substantial earnings without the need for investment in classrooms or teachers. Moving this operation in-house will incur significant capital expenditure and result in lower margins. It will also mean Vocation will have to pay more to student brokers (like the Andrew Demetriou-chaired Acquire Learning, which has aspirations to also list on the ASX) to originate enrolments, while former third-party providers will switch to servicing Vocation’s competitors.

Hutchinson has kept the revenue impact to $20 million precisely by transferring the government cuts to his subcontractors, drastically ostracising them in the process. But these small operators followed written advice from BAWM on enrolment and course delivery, so Hutchinson will inevitably have to settle confidentially with them to avoid those instructions becoming public and, in doing so, book significant “restructuring” write-downs in the process.

Is this really the end of the Department’s inquiries into BAWM’s business practices? There is no reason to think these three courses were conducted in any way differently to others. Risk must surely remain that further digging by auditors will compound Vocation’s pain?

In its October 27 announcement, Vocation claimed that “positive cash flows, which in conjunction with the strong balance sheet means [Vocation] is in a position to take advantage of both organic and inorganic growth opportunities”. That is a tough ask now. The organic growth hurdles are clear. And with its now much-lower market capitalisation, net debt of $40 million and with no capacity to tap the market for more capital, the firm’s acquisitive roll-up strategy is in tatters for now.

With its spectacular meltdown, has Vocation poisoned the well for its peers? Or is privatised training just a basket full of rotten apples, all gaming a poorly policed system of wasteful handouts? That is a vexed question in need of further forensic analysis.

So far, the response to Vocation’s meltdown from Victoria’s Premier Denis Napthine has been to deny that the system is broken. As Victorians go to the polls, and other state governments look on at this debacle, will political contagion structurally destroy this nascent business model?

The Australian Financial Review

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